Source: Beast Finance Author: Beast Finance
Broadcom (AVGO) is a fast-growing semiconductor company with a high dividend payout. Its current dividend yield is 3.2% higher than the average, and its valuation is very reasonable, only 14 times expected net income.
Although Broadcom has also been affected by the recession, its business is not overly cyclical, and its cheap valuation provides investors with a sufficient margin of safety.
Positive Growth Prospects
Many tech stock investors place a lot of emphasis on a stock's earnings growth rate, since the tech sector tends to grow faster than the overall economy. As a result, growth companies are heavily represented in tech compared to slower-growing industries such as autos and consumer staples.
Given that Broadcom's growth has been very strong in the past, Beast Finance believes that the company's future business and earnings per share will still achieve strong growth.
With its portfolio, Broadcom has significant long-term potential in a range of fast-growing markets:
Source: Broadcom Investor Relations
In terms of network business, Broadcom has already set foot in the hyperscale data center business. In the global field, hyperscale data centers are mainly dominated by companies such as Microsoft (MSFT) and Amazon (AMZN), and run their respective cloud computing businesses.
Therefore, cloud computing is definitely a huge and fast-growing market, and it will continue to grow for many years, which means that Broadcom's market opportunities will continue to expand.
In terms of server and storage connection business, Broadcom will also benefit from emerging trends in the growing hyperscale data center market, such as artificial intelligence, augmented and virtual reality, self-driving cars, etc., all require huge computing power, and these computing That capacity often comes in the form of large data centers, so Broadcom's growth momentum in this important market isn't going away anytime soon.
Source: Broadcom Investor Relations
Broadcom's industrial business will also continue to grow. Green electricity requires a smart grid, as many different electricity producers add power to the grid at different times (depending on wind and solar weather conditions), while also adding new electricity consumers, such as electric vehicle charging stations. This will require major upgrades to existing grid infrastructure, and Broadcom will be one of the companies that will benefit from this demand.
In manufacturing, robots and other automated tools are increasing efficiency and helping to address labor shortages, which is why the use of robots is likely to continue to increase in the long run. These robots need to be connected to each other to communicate and have sensors to make them operate efficiently and safely.
In the automotive field, connectivity and sensing systems are also becoming more and more important. Compared with cars ten or twenty years ago, today's cars equipped with driver assistance systems and self-driving technology need more than before. Sensors and chips.
Broadcom still generates most of its revenue from its hardware business, but its software business has also been growing rapidly thanks to Broadcom's continued acquisitions in this area. In software, Broadcom will also benefit from future market growth. Cybersecurity products like Broadcom's are important and likely to become even more so in the future, and therefore will be in greater demand as businesses, consumers, and even governments and state agencies look to strengthen their products and infrastructure, To defend against criminal activities, terrorism, etc.
In conclusion, there are good reasons to believe that Broadcom's business will continue to deliver solid growth over the long term. But since Broadcom has a history of not being able to grow beyond its existing growth base, it's not surprising to see Broadcom making acquisitions from time to time in the future. The bad news is that these acquisitions probably won't bring about the dramatic changes they have in the past, for two reasons:
First, Broadcom's balance sheet is already fairly heavily leveraged and not overly indebted, yet it doesn't have the capacity to keep adding more debt, especially given that rising interest rates will make its future debt more costly . According to Broadcom's latest 10-K filing, Broadcom's current net debt position is $27 billion, equivalent to about 1.6 times this year's expected net profit. Therefore, Broadcom has some ability to add debt, but may not be able to add tens of billions of dollars in debt, which limits its potential for continued growth to some extent.
Second, Broadcom has become quite a large company. It generated $33 billion in revenue last year, up 1,300% over the past 10 years. Adding $1 billion in additional revenue through mergers and acquisitions will not change the development of the industry now compared to five or ten years ago.
For these reasons, Beast Finance believes that Broadcom's growth rate will not be as rapid in the future, although we still expect Broadcom to make small acquisitions here or there. Therefore, Broadcom will definitely not have more than 1000% revenue growth in the next ten years, but fortunately, this is not necessary. Even a 5% revenue growth rate is enough to bring a stable total return, and Boldbeast Finance believes that this will not become a major obstacle to the company's future development.
More resilient than many other chip stocks
Unlike the semiconductor products produced and sold by Micron Technology (MU), many of Broadcom's semiconductor products have not yet been fully commercialized. That's why we expect Broadcom to outperform many other chip companies in a recession or downturn. We've seen Micron Technology, Intel (INTC), Nvidia (NVDA) and other chip companies experience considerable slowdowns in recent quarters, while Broadcom continues to deliver convincing results: In the most recent quarter, the The company's revenue rose 21% year-over-year, beating estimates. Broadcom's guidance for the first quarter also means that its revenue will grow by 16% year-on-year, which is also higher than expected. slow.
still worth the investment
Unlike many other tech companies, Broadcom offers an above-average dividend yield and places a high value on its track record of dividend growth. At current prices, investors can get a dividend yield of 3.2%, which is almost double the current yield of the broader market (1.7%):
Over the past five years, Broadcom's dividend has also grown at a rate of 29% per year, with annual dividend increases going back 11 years. Of course, it's mathematically impossible for Broadcom's dividend to grow by 20%-30% per year forever. But even with significantly lower dividend growth going forward, Broadcom could still provide investors with attractive returns.
As mentioned earlier, 5% annual revenue growth seems like a slightly conservative base case. We believe Broadcom will easily achieve 7%-10% EPS growth over the next few years when combined with the benefits of share repurchases. As such, roughly 10% annual dividend increases for the next few years seem achievable, as the 45% payout ratio also leaves some room for growth. When a company offers a 3.2% dividend yield and can realistically grow 10% annually for the foreseeable future, that's an attractive dividend growth investment -- even though future returns are still low compared to the past 10 years will be lower.
Today, Broadcom trades at 14 times forward net income. That's a pretty cheap valuation compared to most chip stocks, as well as compared to the broader market. When we compare the current valuation to Broadcom's historical valuation, we can see the following:
Broadcom is trading at a 24% discount to its 5-year median valuation, which means now could be a good time to enter or expand a position. Of course, Broadcom's larger size may have less pronounced future growth, which may justify the discount relative to historical valuation standards. But even so, the current P/E ratio of 12 times EBITDA does not seem to be high, and Broadcom's EBITDA valuation seems to be moderately undervalued-in our view, it is not unrealistic to expand the P/E ratio towards 13-15 times EBITDA valuation.
in conclusion
Broadcom's business has grown more than 10-fold over the past decade -- but that probably won't happen again. But with exposure to growth markets and some M&A potential, Broadcom should still deliver solid revenue and earnings growth going forward, which should keep Broadcom's dividend growing.
Broadcom's stock price has risen sharply from last year's lows, but it is only 14 times net income, which is not expensive. The discount to the current valuation relative to historical valuation standards also suggests that Broadcom is currently trading below fair value. We last covered Broadcom last August, when we thought it was one of several attractive income stocks. Since then, Broadcom has outperformed the market by 10%, and it remains attractive to this day.